Market Equilibrium

Market equilibrium is a situation in which market price has reached the level at which quantity supplied
equal quantity demanded. In other words, a market is in equilibrium if at the market price the quantity
demanded is equal to the quantity supplied. The price at which the quantity demanded is equal to the
quantity supplied is called the equilibrium price or market clearing price and the corresponding quantity
is the equilibrium quantity. The interaction of the forces of demand and supply determines the
equilibrium price. The process by which the market attains equilibrium can be explain with the help of
following table and diagram

Market equilibrium schedule

Price (Rs/kg) Quantity Quantity Supplied Surplus/Shortage Pressure on Price

Demanded
5 50 10 -40 Upward
10 40 20 -20 Upward
15 30 30 0 Equilibrium
20 20 40 20 Downward
25 10 50 40 Downward
In the above table, equilibrium price is Rs. 15 where equilibrium quantity is 30 units. Above the
equilibrium price (Rs. 15), the quantity supplied exceeds the quantity demanded. It exerts the price to
fall until it reaches the equilibrium. On the other hand, below the equilibrium price (Rs. 15), the quantity
demanded exceeds the quantity supplied. It exerts the price to rise until it reaches the equilibrium. So,
the process of downward and upward adjustments in price and quantity are continuous until the price
reaches Rs.15 and quantity at 30 units. This process is automatic in free market economy.

Market Equilibrium Curve

In the above figure, the quantity and price are measured along the X-axis and Y-axis respectively. The
upward sloping SS curve is the market supply curve and the downward slopping DD curve is the market
demand curve of the commodity. DD and SS curves are intersected at point E. This is the equilibrium
point where equilibrium price is Rs. 15 and quantity is 30 units. At higher prices, there is excess supply of
the commodity that drives the price down to the equilibrium level. Similarly, at lower prices, there is
excess demand of the commodity that drives the price up to the equilibrium level. In this way, the
market is in equilibrium when the price is Rs. 15 and the quantity is 30 units. It is determined by the
equality of the forces of the market demand and market supply of the commodity.

Change in Market Equilibrium

The change in the behavior of buyers and sellers can cause a shift in the demand curve and supply curve
respectively and as a result of which the equilibrium price and output can be affected.

1. Effect of shift in Demand Curve / Change in Demand: whenever there is shift in demand curve,
there is change in equilibrium point. The demand curve shift rightward and leftward. Therefore,
the effect of shift in demand curve and its corresponding change in equilibrium point can be
divided into two types as follows.
a) Effect of Rightward Shift in Demand Curve

If demand curve shifts towards right remaining the supply curve constant, there will be increase in
both equilibrium price and output. It can be shown using figure as follow.

In the above figure, point ‘E’ is the initial equilibrium point at which market supply curve SS and
market demand curve DD intersect each other. At this point, equilibrium price and quantity are OP
and OQ respectively. After a rightward shift in the market demand curve from DD to D 1D1, remaining
the market supply SS constant, new equilibrium is established at point E 1 where D1D1 curve and SS
curve intersect each other. At the new equilibrium point E 1 price and quantity both are higher than
at the old equilibrium at point E.

b) Effect of Leftward Shift in Demand Curve

If demand curve shifts towards left remaining the supply curve constant, there will be decrease in
both equilibrium price and output. It can be shown using figure as follow.

In the above figure, point ‘E’ is the initial equilibrium point at which market supply curve SS and
market demand curve DD intersect each other. At this point, equilibrium price and quantity are OP
and OQ respectively. After a leftward shift in the market demand curve from DD to D 1D1 new
equilibrium is established at point E 1 where D1D1 curve and SS curve intersect each other. At the new
equilibrium point E1 price and quantity both are lower than at the old equilibrium at point E.

2. Effect of Shift in Supply Curve / Change in Supply

Whenever there is shift in supply curve, there is change in equilibrium point. The supply curves
shift toward right and left. . Therefore, the effect of shift in supply curve and its corresponding
change in equilibrium point can be divided into two types as follows.
a) Effect of Rightward Shift in Supply Curve

When supply curve shifts rightward given the demand curve constant, the equilibrium price
decreases but equilibrium quantity of output increases. The following figure shows this effect.
In the above figure, the point E is the initial equilibrium point at which the given market demand DD
curve and initial supply curve SS intersect each other. At this point initial equilibrium price and
quantity are OP and OQ respectively. After a rightward shift in supply curve from SS to S 1S1, new
equilibrium point is established at point E 1where SS and S1S1 intersect each other. At the new
equilibrium point price falls and quantity increases than at the old equilibrium point E.

b) Effect of Leftward Shift in Supply Curve

When supply curve shifts leftward given the demand curve constant, the equilibrium price increases
but equilibrium quantity of output decreases. The following figure shows this effect.

In the above figure, the point E is the initial equilibrium point at which the given market demand DD
curve and initial supply curve SS intersect each other. At this point initial equilibrium price and
quantity are OP and OQ respectively. After a leftward shift in supply curve from SS to S 1S1, new
equilibrium point is established at point E1 where SS and S 1S1 intersect each other. At the new
equilibrium point price increase and quantity decreases than at the old equilibrium point E.